Reviewed by Komal | Updated on Mar 01, 2023


What is Obligation?

An obligation is a duty of meeting the terms of a contract. If an obligation is not met, the injured party also finds redressal in the legal system.

How Does an Obligation Work?

Financial obligations represent any unpaid loans or regular payments you'll have to make. If you owe or will owe money to anyone, that is one of your financial obligations. Practically, any type of money represents a financial obligation — coins, bank notes, or bonds are all guarantees that the agreed value of the object will be credited to you.

Most formal financial obligations are laid down in written contracts signed by both parties, such as mortgages, student loans, or scheduled service payments. Short selling and put options are the obligations that a broker has to perform.

Obligations are a significant part of personal finance. The budget should first include all the financial obligations that the person is responsible for over the given period of time. A quarterly figure published by the Federal Reserve Board calculates the ratio of household debt obligations to disposable income. This ratio is known as the Financial Responsibility Ratio (FOR), which is a valuable benchmark for individual budgets.

A thorough consideration of obligations is especially important for retirement planning. The individual budgeter will consider more long-term commitments when planning for longer periods of time, such as interest rates on mortgage payments or healthcare costs that are yet to be incurred.

Special Considerations

Failure to fulfil obligations is met with punishment, the degree of which depends on the nature of the contract. If a person fails to make payments regularly for his car, the insurance company will repossess the car.

Taxes, too, are a type of obligation that results in large fines or imprisonment for failing to meet them. If large companies default and are unable to pay their outstanding debts, they will declare bankruptcy, initiating the debtor's total debt relief. This action gives the creditor an opportunity to recover some of their losses in the form of the debtor's properties.

Taxes, too, are a type of obligation that results in large fines or imprisonment if you fail to meet them.

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